UPDATE 2-Rona says to pay half-yearly dividend; shares rise

* To review the new policy from time to time (Adds details, analyst's comments, share price)

By Solarina Ho

TORONTO, Dec 8 (Reuters) - Rona Inc RON.TO, Canada's No.1 hardware distributor and home building supply retailer, said on Wednesday it will begin paying a cash dividend on a semi-annual basis.

Rona declared a cash dividend of 7 Canadian cents a share, payable on March 25, to holders of record on March 10, 2011.

The news helped lift Rona shares to a four-month high, up 2.59 percent to C$13.85 on the Toronto Stock Exchange early on Wednesday afternoon.

"It's positive from the standpoint that we're dealing with retail investors and we like the income aspect of things," said Edward Jones analyst Brian Yarbrough. "It's not a big dividend, but it does give them the flexibility to raise it in the future."

The Boucherville, Quebec-based company said it will review the new policy periodically in light of its cash flow, earnings, financial position and other relevant factors.

Rona, which reported a smaller than expected quarterly profit last month, operates a network of roughly 700 stores. It made a number of small distribution and manufacturing-related acquisitions this year and said on Wednesday reinvesting its cash in long-term growth remains a priority.

Yarbrough, who has a "hold" rating on Rona shares, noted that ratings agencies generally do not look favorably on dividends and that Rona already had a triple B minus rating.

"They're only one notch above junk rating. I'm not saying this is going to put them into junk rating, but I think it could potentially limit their ability to do any larger acquisitions in the future," he said.

He noted, however, that this could be a good thing if the company were to focus on increasing earnings and improving returns instead.

The company warned last month that it could fall short of its 2010 and 2011 targets for sales in stores opened at least a year due to a still-tepid economic recovery and a soft housing market.

$1=$1.01 Canadian
Additional reporting by Aftab Ahmed in Bangalore; editing by
Peter Galloway